Last month, one of the Bay Area’s more distinguished early-stage venture capital firms Uncork capitalcelebrated its twentieth anniversary with a reception at a renovated church in San Francisco’s SoMa neighborhood, where 420 guests showed up to help the company have fun, exchange suggestions and share war stories.
There is little doubt that the venture scene has modified significantly since Uncork’s inception. When founder Jeff Clavier began the company, he mainly used his savings to write six-figure checks to the founders. Today, Clavier and his contemporaries, including First Round Capital’s Josh Kopelman and Felicis’ Aydin Senkut, collectively oversee billions of dollars in assets. If you look at it, the whole industry has change into much greater. In 2004, venture firms committed roughly $20 billion to startups. In 2021, that quantity reached a relatively staggering $350 billion.
As the industry has modified in scale, many road regulations have also modified – some for the higher, some for the worse, and some because the original regulations didn’t make much sense to begin with. On the eve of Uncork’s anniversary, we talked to Clavier and his longtime managing partner, Andy McLoughlin, about some of those changes.
TechCrunch: At some point, it became completely acceptable for full-time VCs to publicly invest their very own money in startups. Previously, venture funders wanted partners to focus solely on investing for the company. Do you remember when every thing modified?
JC: Companies typically have policies that allow partners to invest in things that are not competitive or aligned with the company’s strategy. Let’s say you have a friend who’s starting a business and needs money; if ever a company decides to invest in future rounds then two things: disclosure is needed [the firm’s limited partner advisory committee] saying, “FYI, I was an investor in this company, I’m not a leader, I didn’t price the deal, there’s no funny thing I’m marking myself here for.” Additionally, some corporations may [force] sell the investment in the round to avoid a conflict of interest.
OK, so when did supporting competing corporations change into acceptable? I realize this is still not accepted, but it is what it is more okay than it used to be. I talked to an investor this week who was doing later-stage deals with some pretty direct HR competitors. Both corporations claim that every thing is fantastic, but I can not help but feel that there is something unsuitable with this photo.
I AM: They will probably pretend that every thing is fantastic and will proceed to act that way until it is not, and then there can be a big problem. This is something we take very seriously. If we feel there is a potential conflict, we wish to get ahead of it. We normally tell our portfolio company, “Hey, listen, we’re looking at this thing.” Do you see it as competition? We actually had it this week. We think so indeed [a] very different [type of company]but we wanted to go through all the steps and make everyone feel very comfortable.
Honestly, if we had a company that wanted to raise a Series A, I might never allow them to talk to a company that had a competing investment. I just think the risk of data leakage is too great.
Perhaps this particular situation highlights how little control founders currently have. Perhaps VCs will give you the chance to support competitive investments now when they would not give you the chance to at one other point in time.
I AM: There are very few late-stage deals, so it may very well be that the founder had to swallow it because the deal was too good to pass up. There are at all times so many dynamics at play that it’s hard to know what is going on on behind the scenes, but it’s something that makes me personally very uncomfortable.
Another change concerns boardroom positions, which have long been seen as a way to highlight the company’s value – or investment – in a start-up. However, some VCs strongly advocate against accepting such funds, arguing that investors can gain greater insight into corporations between board meetings.
JC: It is your fiduciary duty to concentrate and help, so I find this statement ridiculous. Sorry. This is our job – helping corporations. If you have a large stake in the business, it is your job and your responsibility [to be active on the board].
I AM: A nasty board member will be a burden to the company. But we have been fortunate to work with some really amazing board members who have joined Series A, B and C, and we just see what an incredible impact they’ll make. In our case, if we create a board at the seed stage, we are going to take a board seat if needed, we are going to go through a Series B and at that time we are going to call it quits to give our seat to another person because the value we are able to provide upfront from zero to one , is very different from what a company needs once its value reaches $10-50-100 million [in annual revenue].
With the exit market stalled a bit, do you discover that you just’re on boards longer and does that limit your ability to get involved with other corporations?
I AM: This probably has less to do with exits and more to do with later-stage rounds. If corporations don’t raise Series B and C, then yes, we can be in these forums longer. This is a consequence of the current state of financing markets, but we see that the situation is starting to improve again.
Another thing that happened in crazy times [of recent years], we’d find that these late-stage crossover funds would lead the Series B and possibly even the Series A, but they might say, “Look, we don’t take board seats.” As a seed investor, we had to stay longer. Now, with those self same corporations not making such deals and more traditional corporations supporting Series A and B rounds, they are taking those spots again.
Andy, we talked last summer when there was still a lot of cash circulating around seed rounds. At that point, you predicted a decline in 2024. Did this occur?
I AM: There are still a lot of seed funds on the market, but many are starting to get to the end of their fund cycle and can be pondering about fundraising. I think this rude awakening is a lot [of them] there are sources of capital waiting that will be very willing to give them money in 2021 or even 2022 – a large a part of them has disappeared. If you have been raising money primarily from high-net-worth individuals – form of like non-institutional LP players – it’s going to be really difficult. So I actually think the variety of lively seed funds in North America will go from, let’s call it 2,500 today, to 1,500. I bet we’ll lose 1,000 in the next few years.
Even with the market booming?
I AM: The market could also be doing well, but people don’t see much liquidity, and even the wealthiest have a finite amount of money to put to work. Until we start to see real money return – outside of major events here and there – it’s just going to be difficult.
What do you think about this wave of artificial intelligence and are the prices reasonable?
JC: There’s a lot of overpricing going on and [investing giant amounts] is not what we do at Uncork. A big seed round for us is about $5 or $6 million. We could stretch to $10 million, but that will be the maximum. So everyone is trying to work out what investment makes sense and how thick a layer of functionality and proprietary data is needed to avoid being crushed by the next generation [large language model that OpenAI or another rival releases].
I AM: People were losing their mind about what artificial intelligence meant and almost forgetting that at the end of the day, we are still investing in corporations that need to be large and profitable in the long term. It’s easy to say, “Look, we’ll secure this and maybe we can find a place to sell this business,” but truthfully, many enterprise AI budgets are still small. Companies are dipping their toes in the water. They may spend $100,000 here or there on [proof of concept]but it’s currently unclear how much they intend to spend, so we want to look for corporations that we think could also be sustainable. The fundamentals of the work we do have not modified.